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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

During the 2007-2009 crisis, the U.S. Treasury's Troubled Asset Relief Program (TARP) was initially designed to purchase toxic assets but was largely redirected to a different use. Which use best describes the main way TARP funds were deployed in late 2008?

TARP funds were mainly used for direct capital injections into banks via preferred share purchases. Valuing and buying toxic assets was too slow and difficult, so Treasury recapitalized institutions directly to restore confidence and lending capacity.

  1. ADirect capital injections into banks through preferred share purchasesCorrect
  2. BGuaranteeing all money market fund balances through a rule change
  3. CFunding purchases of Treasury securities by the Federal Reserve
  4. DBuying residential mortgages from households to prevent foreclosure

Explanation

After Lehman's failure, pricing and buying illiquid assets proved hard and slow. Treasury shifted to the Capital Purchase Program, injecting capital into banks via preferred stock. The other options describe different programs or are not the main use of TARP.

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